A balance sheet is a financial statement that shows a company's assets, liabilities, and equity at a particular point in time. Using balance sheets, investors can calculate rates of return and evaluate a company's capital structure.
Balance sheets show what a company owns and owes, as well as the amount invested by shareholders. In addition to balance sheets, other important financial statements can be used to calculate financial ratios or conduct fundamental analysis.
Balance sheets provide an overview of a company's financial situation at a given point in time. On its own, it can't convey an understanding of trends over a longer period of time. As a result, it is necessary to compare the balance sheet with those from previous accounting periods.
Many ratios can be derived from a balance sheet to determine a company's financial health, including the debt-to-equity ratio and the acid-test ratio. Also useful in assessing a company's finances are the income statement and cash flow statement, along with any notes or addenda in an earnings report that references the balance sheet.
The balance sheet follows the following accounting equation, with assets on one side and liabilities plus shareholder equity on the other side:
Assets = Liabilities + Shareholders' Equity
It's an intuitive formula. Essentially, a company has to borrow money to pay for everything it owns (assets) or to issue shareholder equity to pay for it.